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Photo by COURTESY OF TAUBMAN CENTERS INC.
With walkable public areas and events, plus a movie theater, The Mall at Partridge Creek in Clinton Township is one of the region's first lifestyle centers. Partridge Creek is among seven malls Bloomfield Hills-based Taubman Centers is selling.

Dear Michigan: It's not personal. It's business.

For Taubman Centers Inc., the pending sale of two prominent local malls is all about the cash, continuing a company strategy of generating capital for new deals.

For buyer Starwood Capital Partners Inc., the deal is about jumping into the Michigan market amid the state's improving real estate and jobs outlook.

Analysts said last week the announced $1.4 billion deal for Bloomfield Hills-based Taubman to sell Dearborn's Fairlane Town Center and The Mall at Partridge Creek in Clinton Township was unexpected, but followed Taubman's usual model in real estate holdings.

In other words, an eager buyer found a willing seller.

Greenwich, Conn.-based Starwood and Taubman Centers (NYSE: TCO) jointly announced the agreement to purchase seven U.S. malls, including Partridge Creek, which was built in 2007 and has 600,000 square feet of space, and Fairlane, which was built in 1976 and has 1.4 million square feet, according to Taubman's presentation to investors last week.

Partridge Creek is one of the region's first lifestyle centers with walkable public areas and events, plus a movie theater. Fairlane, which also has a theater, opened the same year as Lakeside Mall in Sterling Heights, but more than two decades after Northland Center in Southfield, also developed by Taubman. Northland was, when it opened, the largest shopping center in the world.

'Capital recycling'

Taubman's strategy with the most recent sale is to leverage capital for growth, distribute a special dividend to shareholders, and minimize its need to raise equity, the company told investors last week.

That keeps with Taubman's historical strategy of "capital recycling," according to a Morningstar Inc. analyst note provided to Crain's by Todd Lukasik, senior analyst in the real estate sector for the Chicago-based company.

"We weren't expecting the asset sales, but this type of capital recycling has been a hallmark of Taubman throughout its history, as one of the few retail REITs (real estate investment trusts) that has not amassed an ever-increasing number of assets in its property portfolio," the note said.v"Instead, Taubman's strategy has focused on improving the quality and productivity of its mall portfolio through strategic developments, redevelopments, acquisitions and dispositions, and this transaction is in keeping with that goal."

Steve Sakwa and Gwen Clark, analysts with New York City-based International Strategy & Investment Group LLC, agreed in a Wednesday report that the company "has not been shy about pruning its portfolio since its IPO in 1992."

The Morningstar note said that $453 million of the sale proceeds are expected to be paid out as a special divided (about $5 per share) early next year unless Taubman Centers can find new assets to purchase. That leaves $268 million in cash for future investments.

Neither Starwood — whose Chicago-based, wholly-owned subsidiary Starwood Retail Partners will manage the malls — nor Taubman would comment beyond publicly released statements last week. The sale is expected to close in the fourth quarter.

Among brokers and real estate attorneys, though, the move was seen as a sound decision by Taubman Centers, which mall pioneer A. Alfred Taubman founded in 1950.

Bill Bubniak

"Now is a good time to sell properties," said Bill Bubniak, executive vice president overseeing investment sales at Southfield-based NAI Farbman.

"We are seeing there is a lot of money out there chasing deals. It's tougher to find deals in coastal cities, so we are seeing more money come here to Michigan and Ohio than we have in the last few years. ... It's showing more out-of-town confidence making volleys into Michigan."

Bubniak pointed to the sales of two landmark office properties — the 2.2 million-square-foot Southfield Town Center for $177.5 million last month to 601W Cos. and the 800,000-square-foot Travelers Tower complex in Southfield for $25.1 million to Time Equities Inc. in May 2013 — both sales to New York companies, as key indicators of out-of-state interest.

"It may be glamorous to have property in Miami and San Francisco on the covers of your brochures, but it's all about returns," Bubniak said.

Bubniak said a stronger automotive industry and fewer commercial real estate foreclosure sales in recent years are making the Michigan market attractive to investors.

The forecast for Fairlane

Photo by COURTESY OF TAUBMAN CENTERS INC.
Brokers and real estate attorneys say the sale of Taubman Centers' holdings may be a sign that even aging Fairlane Town Center (above) in Dearborn has a stable outlook in the next few years.

Other local brokers and real estate attorneys agreed the Starwood deal reflects a growing out-of-state investor appetite for Michigan property, and may be a sign that even aging Fairlane Town Center has a stable outlook in the next few years.

It's also a chance for Taubman Centers to shore up capital for growth and reduce its debt load — the company last November closed on a $475 million term loan with four of its mall-owning subsidiary companies acting as guarantors, including two involved in the sale.

Other malls in the Starwood deal are MacArthur Creek in Norfolk, Va.; The Shops at Willow Bend in Plano, Texas; Stony Point Fashion Park in Richmond, Va.; Northlake Mall in Charlotte, N.C.; and The Mall at Willington Green in Wellington, Fla.

Morris said he doubts that Starwood is looking to court a major retailer or make changes to the tenant mix of its new shopping centers. Instead, he believes Starwood was attracted to a potential rate of return in Michigan and probably looked carefully at Taubman's tenant mix at Fairlane, perhaps its softest local asset, before closing.

Steve Morris

"Fairlane is a mature center, but it's near Ford (Motor Co.) headquarters. Downtown Dearborn has seen a real comeback, and the residential market there is looking solid. It's possible that (Fairlane) was just a part of the portfolio (in the deal) and they'll be looking to sell it off soon. But there are reasons to be optimistic."

Real estate investment trusts and other financial buyers appear to be eyeing Michigan and other Midwestern markets in part because of recent resurgence in property values and jobs data, said Kyle Hauberg, director of the real estate and environmental department at Dykema Gossett PLLC in Bloomfield Hills.

Michigan added 17,100 new jobs in May, including 4,500 manufacturing jobs, according to a recent report from the state Bureau of Labor Market Information.

"There is not only perhaps a riper market here to invest but perhaps less competition and more return," Hauberg said.

Taubman estimates the capitalization rate on the seven malls in the sale was 6.6 percent, according to the report to investors, suggesting the properties may generate about $93 million a year in combined income.

Mark Rubenfire, coordinator of the real estate practice group at Southfield-based Jaffe Raitt Heuer & Weiss PC, said Starwood simply views future opportunity in Michigan. Starwood has been building a retail real estate company through acquisitions as the U.S. economy improves.

"I don't think that the black mark that Michigan had for a while on real estate is there anymore, but it hasn't been there for at least two or three years," he said. "Beyond that fact, I don't read too much into that specific transaction, other than just an anxious buyer meeting a willing seller."

Retail scorecard

Under the terms of the deal, Starwood will pay $785 million in cash and assume $620 million in debt, according to a statement from the companies. A $78 million loan for Partridge Creek at a 6.15 percent interest rate and maturing in July 2010 is part of that debt, according to filings with the U.S. Securities and Exchange Commission.

Taubman Centers currently owns, leases and/or manages 27 retail properties in 15 states and South Korea.

The company reported mall tenant sales per square foot of $721 in 2013 and upon completion of the Starwood deal expects its mall tenant sales to increase $828 per square foot, according to documents presented to investors.

Taubman reported $330.8 million in 2013 funds from operations, or $3.65 a share, on revenue of $767.2 million. For the first quarter of 2014, it reported $81.2 million in funds from operations, or 90 cents a share, on revenue of $174.8 million. Funds from operations is an accounting standard used by real estate investment trusts that reflects net income plus adjustments such as depreciation and amortization.

As of Friday morning, Taubman stock was trading at $75.66 a share. On Tuesday, Taubman was trading at $73.68; it got as high as $75.90 last Wednesday after the announcement.

Taubman will have 17.17 million square feet of space across the U.S. after the sale closes.

The company told investors that the net operating income from Sarasota, Fla.; Waikiki, Hawaii; and San Juan, Puerto Rico, properties it is developing is expected to replace the net operating income of the seven it is selling. The three shopping center projects, along with three others in China and South Korea, are expected to be completed by 2016.

After the sale, Taubman expects its remaining properties to have an occupancy race of 93.7 percent, or 1.6 percent higher than the reported 92.1 percent last year. The average rent in its portfolio will increase from $48.52 per square foot in 2013 to $56.23, according to the investor document.

Looking ahead

Robert S. Taubman

Other Taubman properties in Michigan include Twelve Oaks Mall in Novi and Great Lakes Crossing in Auburn Hills, both of which are solely owned by Taubman, said Chris Tennyson, a spokesman for the company.

"The seven centers we are selling are strong properties that fit well within the Starwood portfolio and will continue to thrive under their management," said Robert S. Taubman, chairman, president and CEO of Taubman Centers, in a press release.

The deal with Taubman will expand Starwood's portfolio to 28 properties in 15 states, Barry Sternlicht, chairman and CEO of Starwood Capital, said last week.

"The Taubman portfolio broadens our relationships with higher-end department stores and in-line (smaller) tenants and gives us an excellent opportunity to continue to produce attractive returns for investors," he said in the statement.